What is Making Tax Digital (MTD)?Understanding HMRC’s new tax system

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is an HMRC initiative that will revolutionise the UK tax system and ultimately bring an end to self-assessment.

The primary aim of Making Tax Digital is to make tax administration more effective, efficient, and easier for taxpayers through the implementation of a fully digitalised tax system by 2020, whilst also reducing HMRC’s overheads for managing tax affairs.

The changes apply to a wide range of taxpayers, including most businesses, self-employed professionals, and landlords. This ‘new and improved’ tax system will require the majority of business owners to maintain digital records using compatible software.

Making Tax Digital (MTD) for VAT reporting starts from April 2019 and introduces significant new rules for how the majority of companies will submit their returns. MTD for VAT focuses on three key requirements;

  • Digital record keeping – storing all transactions in electronic form
  • Digital links – have a digital link between final numbers and source data
  • Digital submissions - all submissions must be made using appropriate software via HMRC’s new gateway

Frequently asked questions about MTD

What is Making Tax Digital?
What is a digital tax account?
What is the timeline for Making Tax Digital?
Is Making Tax Digital cancelled?
What does the deferral of Making Tax Digital mean for accountants?
What about ‘Digital Record Keeping’?
What does quarterly reporting mean for VAT-registered businesses?
Will ‘Optional Digital Record Keeping’ be widely adopted?
Do accountants need VAT software for Making Tax Digital (MTD)?
Will HMRC continue to provide a VAT solution for MTD?

Frequently asked questions about MTD for VAT

What is the timeline for MTD for VAT?
What is a “digital” record?
Is a spreadsheet a digital record?
What is a “digital” link?
How do we digitally link source data for a VAT group where each member entity has different source systems?
Does the software used to digitally send the VAT return have to be HMRC approved?

Frequently asked questions about MTD

What is Making Tax Digital?

Originally announced in the spring 2015 Budget, the MTD initiative will enhance the use of digital data to modernise the UK tax system by 2020, thus making HMRC the most efficient tax authority in the world.

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What is a digital tax account?

HMRC is replacing tax returns with digital tax accounts for millions of businesses and individuals. A digital tax account brings together each taxpayer’s details in one place, just like an online bank account. Taxpayers will be able to view their tax affairs in real time, update their information, register for new services, see at-a-glance how their tax is calculated, and choose payment options.

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What is the timeline for Making Tax Digital?

This is the latest Making Tax Digital timeline, announced by HMRC on 13 July 2017:

From April 2019, quarterly reporting is:

  • Mandatory for VAT for all VAT-registered businesses with a turnover above the VAT registration threshold (£85,000)
  • Optional for VAT-registered businesses with a turnover below the VAT registration threshold (£85,000)

From April 2020 (at the earliest), quarterly reporting is:

  • Mandatory for income tax and corporate tax (as appropriate) for all businesses (including landlords) with a turnover over the VAT registration threshold (£85,000)
  • Optional for businesses (including landlords) with a turnover below the VAT registration threshold (£85,000)
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Is Making Tax Digital cancelled?

The simple answer is no. Making Tax Digital is more than just quarterly reporting. Quarterly reporting was an unpopular aspect of the programme that received the majority of press coverage, but MTD has many benefits to offer accountants and their clients.

As HMRC continue to digitise their tax records, Thomson Reuters customers will be able to use our software to access near-live client data to get a full view of their tax affairs.

Today, submitting a Self Assessment tax return to HMRC is a one-way process with little value beyond compliance.

In the future, MTD will enable a more holistic approach to managing a client’s tax affairs, providing awareness of business events as they happen and offering relevant advice.

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What does the deferral of Making Tax Digital mean for accountants?

There has been concern that quarterly reporting would be a time-consuming struggle, particularly for smaller businesses, accountants, and their clients. Professional bodies, treasury select committees, and other organisations canvassed government to get the timeline for MTD eased, and the deferral has been widely welcomed by the accounting industry.

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What about ‘Digital Record Keeping’?

Only those businesses with an obligation to file quarterly (VAT-registered businesses with a turnover over the threshold) are obliged to keep digital records. For all other businesses, this becomes optional.

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What does quarterly reporting mean for VAT-registered businesses?

It should be noted that the vast majority of VAT-registered businesses already report quarterly for VAT today, and so, other than a technical change in April 2019 to the actual method or reporting, the data reported and frequency of report is unlikely to change for most businesses.

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Will ‘Optional Digital Record Keeping’ be widely adopted?

Only time will tell. There are benefits to digital record keeping vs. poor or paper records, and these have not changed:

  • Collaboration of data between agent and client
  • Robust records vs. no records
  • Efficiency of data transfer between client/agent/HMRC
  • Ability for agent to react to live data and proactively offer advice
  • Efficient processing of data

However, whether agents discuss these benefits with their clients will, initially at least, be up to them. Over time, it is likely that digital record keeping will become ‘the norm’ in many cases.

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Do accountants need VAT software for Making Tax Digital (MTD)?

Currently, the vast majority of accountants use HMRC’s gateway to make the submission for their small clients, which is a relatively simple submission process.

For more complex or larger clients, VAT submission is usually performed by a dedicated product, such as ONESOURCE Indirect Tax, or from a bookkeeping product.

Discover ONESOURCE Indirect Tax

Will HMRC continue to provide a VAT solution for MTD?

It is unclear whether they intend to continue providing a VAT solution under MTD. For quarterly reporting of income tax, HMRC stated that they were not going to continue to provide their own software.

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Frequently asked questions about MTD for VAT

What is the timeline for MTD for VAT?

From April 2019 all VAT registered businesses over £85K turnover must comply with MTD requirements.

This means the April-June 2019 VAT return will be the first return required to be filed according to the new MTD regulations due in July/August 2019.

If your VAT return period is Feb-April or Mar-May, then the first VAT return periods subject to MTD will be May-Jul and Jun-Aug respectively.

Making Tax Digital resources

What is a “digital” record?

Digital records mean records that are captured and held in an electronic/digital format and can viewed on a computer, whether a desktop, laptop, tablet or mobile phone. This could include:

  • a digital image/copy of a paper record (such as a photo, legibly showing all the necessary details, taken on a camera phone close to the point of the transaction)
  • an entry into and accounting system or other software solution or app.

The record itself must include, as a minimum, the date, amount and category of each business transaction.

Further details are contained in regulations (The Value Added Tax (Amendment) Regulations 2018 (2018/261)) and VAT Notice, which is now available.

VAT Notice 700/22: Making Tax Digital for VAT

Is a spreadsheet a digital record?

Yes. However, you need to be very careful as HMRC will expect to see an audit trail of any changes made to the transaction records, showing what changes are being made and why. This can be very difficult to manage in a spreadsheet and a much better solution would be to have a dedicated compliance solution like ONESOURCE Indirect Tax Compliance that will ensure an audit trail is maintained throughout the VAT return process.

How do we digitally link source data for a VAT group where each member entity has different source systems?

It is widely recognised that a VAT Group return is generally consolidated from several sources of data, MTD is not regulating the internal processes of how this is achieved. The flow of data being processed when arriving at the consolidated return however should be digital, notwithstanding any adjustments.

Does the software used to digitally send the VAT return have to be HMRC approved?

HMRC do not approve software. However, HMRC is currently working with vendors like Thomson Reuters to test various software solutions to send the VAT return through their API. HMRC provides each software system with a unique reference so when that system links to HMRC's API in the future it will be authenticated. Make sure that any software you are using for this purpose has been tested and the link to HMRC has been authenticated.

Next Steps

Software for MTD

Understand our software for Making Tax Digital, which is part of HMRC’s MTD Pilot.

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Making Tax Digital VAT Software

Understand our Corporate software for Making Tax Digital.

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